A year on from Freedom and Choice

Also on KPMG.com

Back in April 2015, Defined Contribution (DC) pension schemes changed significantly with the new Freedom and Choice rules. This meant that pensions could be taken much more flexibly, with headlines predicting a sudden spending spree by retirees. Fast forward to the present day and, while that hasn’t quite happened, people have certainly taken advantage of the new rules, either drawing down more of their pension pot or taking it all as cash.

What’s the relevance to the social housing sector? Our pension conversations usually focus on Defined Benefit (DB) schemes such as the Social Housing Pension Scheme or the Local Government Pension Scheme. However, there is an increasing shift within the sector towards a range of DC schemes.

More than a year on from the changes, now is a good time for you to take a closer look at just what is happening with your DC scheme. Providers have had time to consider how to respond to the changes and so should now have a new offer in place. If your DC arrangement is with an insurance company or run by a multi-employer arrangement you may not have had much say in these changes. But it’s important that employers understand the changes because they will affect how your employees value their pension and make plans for retirement.

Although the freedoms of DC schemes can be broadly understood, they bring with them a range of intricacies. For example, the provider you use and the size of each employees’ pension pot will have a big effect on the charges and whether they can even access all of the freedoms.

DC pots are normally moved into bond investments close to retirement, but with fewer people buying annuities and people retiring later, this approach may no longer be appropriate. Although common sense to pension professionals, many employees won’t have the understanding or interest to decide on changes. Indeed, they may never have made any investment decisions, in which case their pension will be invested in their scheme’s default fund.

Since the introduction of auto-enrolment in 2012, DC schemes are required to have a default fund. With the new retirement freedoms, it is more difficult to choose a default structure that is suitable for everyone, as you don’t know what choices employees are going to make at retirement. Providers have been establishing new solutions and employers should review these and decide if change is needed. Understanding this may raise wider questions around whether your current provider remains the right overall fit for you.

And so we come back to the need to engage with providers. One year on and they have new solutions but further work to do, for example considering the new Lifetime ISA. As an employer, your role is to review these developments, understand how your provider stacks up against the broader market and seek employee feedback to test whether your current DC scheme is providing good value, or if changes are needed.

More generally in the private sector, as companies have moved from DB to DC schemes, they have done so in stages, moving from off-the-shelf arrangements and add-on sections to DB schemes through to bespoke arrangements more suited to their requirements. Although the crystal ball is still misty for the social housing sector, a greater focus on and understanding of DC schemes now can’t be a bad thing as the sector looks to get the right building blocks in place for future pension provision.